Economics revision

Fiscal Policy

Policy Instruments

• tools that help governments achieve their macroeconomic objectives.

For Example

• tax rates, and levels of government spending

• Changes in policy instruments can affect other variables in the economy 

Fiscal Policy

• Adjusting levels of government expenditure and taxation to influence aggregate demand in economy

• Can e used to influence behavior of firms and individuals

For example

• Heavy taxes on cigarettes to deter consumption

• Annually, the government plans the budget and publishes it

Government Revenue

• Main source is taxation

Many governments tax for these reasons...

• To pay for public sector services

• Discourage certain activities like taxes of cigarettes 

• Help to control aggregate demand in economy

• Fair distribution of wealth in the economy

Most government taxes fall into 2 categories

Direct Taxes

• Taxes on firms and individuals, usually linked to income and wealth

Some key ones are listed below…

• Income tax-Direct tax on the amount earned by an individual. Common and important worldwide

• Social insurance tax-Similar to income tax; imposed on people’s income. But money is collected specifically for pensions, benefits and health are

• Corporation tax-Imposed on profits made by limited companies. Other types of business like partnerships are likely to be income tax

• Capital gains tax- Imposed on financial gains made when selling assets at a profit. Like shares, businesses and properties attract capital gains tax.

• Inheritance tax- paid on money that is inherited from people who die. Most countries a certain amount of money can be passed  on to benefactors before tax applies

Indirect Taxes

• Taxes on spending

Here are some…

• Sales taxes-taxes on spending. For example VAT 

• Duties- heavy taxes on a select range of goods

• Custom duties-Taxes on imports

• Council tax- collected by local authorities to help pay local services like refuse collection. Levied according the residential property and is paid by occupants

• Business rates-Collected by local authorities and contribute to local community services. But they’re paid by businesses and are levied according to the business property value

• Stamp Duties-Paid when buying certain assets, such as houses and shares

Environmental Taxes

-Designed to protect the environment

Here are some…

• Landfill Tax- Imposed on disposal of waste in landfill sites.  Charge is linked to weight of waste

• Climate change levies are used to help countries meet their commitment to reducing greenhouse gas emissions. Mainly paid by suppliers of gas and coal

• Aggregates Levy-Tax on sand, gravel and rock that’s dug from the ground. Designed to reduce damage by quarrying

Government Expenditure

• Total planned expenditure and amount to be spent on each category is announced each year

• Some countries divide government spending into mandatory spending and discretionary spending  

  • Mandatory are determined by current systems. Payments are made automatically

  • Discretionary is ‘extra’ or ‘new’ spending

Fiscal Deficits and Fiscal Surpluses

Fiscal Deficit is when…

• Government's plan to spend more than they receive in tax revenue

  • The government must borrow money to fund the deficit

Fiscal Surplus is when...

• The government were to spend less…